Inheriting Savings Bonds

When a son or daughter inherits Saving Bonds from their parent's estate, do they pay taxes on the interest when they cash them in?

Tom's response

Yes, typically income tax is paid when the bonds are redeemed.

However, it's also possible for the income tax owed up to the date of your parent's death to be paid on your parent's final tax return (without cashing the bonds.) This makes sense if your parent's tax rate on that final return is lower than yours.

If you go this route, it's important that you have a copy of that final return so that when you cash the bonds you don't pay the tax a second time. (The 1099-INT you will receive when you cash them will be for the entire amount of interest earned; you have to deduct the portion that has already been paid on your tax return).

My book has complete information on all the issues related to inheriting Savings Bonds.